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Post by Sapphire Capital on Nov 27, 2008 22:59:22 GMT 4
Consumption Externality and Equilibrium Underinsurance Rachel J. Huang Ming Chuan University - Department of Finance Larry Y. Tzeng National Taiwan University - Department of Finance Journal of Risk & Insurance, Vol. 75, Issue 4, pp. 1039-1054, December 2008 Abstract: Relative consumption has been found to be crucial in many areas, such as asset pricing, the design of taxation, and economic growth. This article extends this line of research to the individual's insurance decision. We first define keeping up with the Joneses in the purchase of insurance and find that jealousy does not necessarily give rise to keeping up with the Joneses. We also identify several sufficient conditions that cause the optimal coverage in the private market to be less than the social optimum (equilibrium underinsurance). Jealousy is found to be neither a sufficient nor a necessary condition for equilibrium underinsurance. We further show that a social welfare maximizing government could adopt a tax system to correct for the consumption externality and make individuals better off. papers.ssrn.com/sol3/papers.cfm?abstract_id=1296896
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